Explain the two approaches used by the FDIC to manage a failed bank: the payoff method...

Explain the two approaches used by the FDIC to manage a failed bank: the payoff method and the purchase and assumption method.

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Expert Solution

Two methods the FDIC uses to handle a failed bank are
the payoff method and the purchase and assumption method.

Payoff Method

This method is used by the FDIC to handle a failed bank - the FDIC allows the bank to fail and pays off depositors up to the $250,000 insurance limit. After the bank has been liquidated, the FDIC lines up with other creditors of the bank and is paid its share of the proceeds from the liquidated assets.

Purchase and Assumption Method

Under this method the FDIC reorganizes the bank, typically by finding a willing merger partner who takes over all of the failed bank's liabilities so that no depositor or other creditor loses money.Purchase and assumption is a transaction in which a healthy bank or thrift purchases assets and assumes liabilities from an unhealthy bank or thrift. The FDIC arranges the purchase and assumption for FDIC-insured institutions. Depositors of the old institution immediately become account-holders of the new one; while their funds are intact, interest rates and other terms may change.

Rahul Sunny answered 1 year ago

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